Group says proposed constitutional amendment costs state taxpayers nothing

An email blast advocating for a proposed constitutional amendment on the Nov. 8, 2011, Texas ballot says Proposition 2 will help "build critical local water supply projects that create jobs and protect us from drought and wildfire."

The email from Texans 4 Prop 2, funded by the H2O4TEXAS political action committee, goes on: "This does not cost state taxpayers any money. Yes, that’s right, Prop 2 advances critical, job-creating local water projects at no cost to state taxpayers."

Residents of communities benefiting from the requested $6 billion boost in bonding authority would pay such debt costs.

We wondered if state taxpayers would be scot-free.

The proposition, among 10 changes to the constitution placed before voters by state lawmakers, would authorize the Texas Water Development Board to issue additional general obligation bonds on a continuing basis for one or more accounts of the Texas Water Development Fund II, according to an explanatory statement from the state.

According to a July 2011 House Research Organization background paper on the proposition, the bonds are "self-supporting.They require no draw on (state) general revenue," meaning revenue ponied up from state taxpayers, "but use the state’s superior credit rating to finance water and wastewater projects for public entities — including cities, districts, and nonprofit water supply corporations — at a lower interest rate than the entities could receive with other financing." To date, non-self-supporting bonds approved by lawmakers have required state revenue to cover a portion of the interest on the bonds.

After asking the pro-proposition group for backup information, we interviewed Melanie Callahan, the board’s interim executive administrator, who said the reason there’s no state cost for such self-supporting bonds is that debt on the bonds is repaid by the benefiting entities. To date, she said, no jurisdictions have defaulted on such payments.

Case closed?

Not quite, we realized.

Two analyses of the proposal -- a fiscal note written by the Legislative Budget Board when lawmakers were acting last spring and a description of the ballot proposal by the Texas Legislative Council, which helps legislators draft proposals -- state that Proposition 2 allows legislators to appropriate money to pay debt service on the bonds. If so, we surmised, any such appropriation would pose a cost to state taxpayers.

Generally, the fiscal note says, the proposed amendment has no "significant fiscal implication to the state... other than the cost of publication" on the ballot, $105,495.

However, the note says, the proposal "includes bond authority that would comprise a mixture of self-supporting debt and non-self-supporting debt," meaning debt not covered by the benefiting jurisdictions repaying the state. "Any non-self-supporting debt that receives a General Revenue appropriation for debt service," the note says, "would impact the state's constitutional debt limit," meaning it would be a cost to the state and its taxpayers.

The note continues by saying the water-development board can only issue such non-self-supporting debt with legislative authorization.

The council’s analysis includes similar language.

In interviews, a board staff spokesman, John Barton, and the council’s chief legislative counsel, Jeff Archer, each said the reference to legislators subsidizing debt payments reflects the established constitutional authority of Texas legislatures to appropriate money.

Archer said the ballot proposition might pose "little to no risk to the state revenue. That doesn’t mean there’s no risk," meaning a future Legislature could supplement related debt payments by tapping state revenue.

We checked back with the water development board. General Counsel Ken Petersen said that under the constitution, lawmakers have full power to manage the board’s financing activities by changing state law and appropriating state revenue for any purpose, including debt payments.

Proposition 2 alone "does not cost state taxpayer money at all," Petersen said. "What could cost (taxpayer) money is what the people who get elected to the Legislature (in the future) choose to do... That is a choice the Legislature makes."

Callahan told us lawmakers have done so before in situations when debt payments by benefiting communities would not flow quickly enough to the state to satisfy terms.

More than $1.7 billion in board-overseen general-obligation bonds outstanding as of Aug. 31, 2011 consisted of $1.2 billion in self-supporting bonds, with debt not paid by state taxpayers, and nearly $528 million in non-self-supporting bonds for which legislators voted to pick up a portion of debt service, at a cost to state taxpayers, she said by email.

Most recently, Callahan said, the water board got legislative permission this spring to convert $24.5 million in self-supporting bonds for the San Antonio Water System to build a brackish water desalination project into non-self-supporting bonds, with a portion of interest on the bonds consequently being paid from state revenue.

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"The Legislature's direction to issue non-self-supporting debt has been more prevalent in the last few years in order to help fund state water plan projects, in the absence of a dedicated funding source" for such projects, Callahan said.

Of about $512 million in debt service paid by the water development board from 2008 through August 2011, about $101 million, or 20 percent, came from legislative appropriations, Callahan said, with benefiting jurisdictions covering the rest.

The treasurer of the H2O4TEXAS PAC, Heather Harward, agreed that future Legislatures could spend general revenue to cover the debt service on the non-self-supporting bonds envisioned in the ballot proposal. "But as of today, based on the will of the (2011) Legislature and the direction provided to lawmakers by Texans, the bonds are completely self-supporting," Harward said by email. She added that the proposal "does not encumber any state funds."

We’re ready to cash out: The group's claim sidesteps the fact that taxpayers of jurisdictions benefiting from the bonds will face bond-related costs. And while the additional bond authority sought in the proposition would not cost state taxpayers--up front--state lawmakers could still exploit their standing authority, as before, to spend state revenue on related debt. This possibility is unacknowledged in the group’s claim, which we rate Half True.